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Pakistan is now a basket case bigger than even Bangladesh Asia Times

 


The unfortunate phrase international basket case might apply better to Pakistan today than when it applied to Bangladesh in the 1970s, the former eastern half of Pakistan. Bangladesh has overtaken Pakistan economically and in terms of quality of life.

There is even talk of upgrading Bangladesh to upper-middle-income country status. Quite a reversal of fortune because no one talks about Pakistan that way.

Pakistani economists lament that Bangladesh overtook Pakistan in just a few decades. Pakistan’s remittance earnings exceed its stagnant export earnings, and the two combined cannot pay for its imports.

Pakistan’s economy is in a precarious state and some are calling on Pakistan to suspend payment of its ever-growing external debt, most of it 30% owned by China.

An increase in Pakistani tax revenue is good news, but it remains to be seen whether Pakistan can improve its tax-to-GDP ratio, which is among the lowest in the world at 9.5%. Pakistan’s budget deficit is 7.9% of GDP and continues to remain dangerously high despite the government’s continued promises to the IMF to put its finances in order.

Successive Pakistani finance ministers have long promised to raise or even double Pakistan’s tax-to-GDP ratio, but they have proven unsuccessful after facing determined opposition. Entire sectors of the Pakistani economy, agriculture, retail and property development are virtually untaxed.

For example, OECD countries collect about 2% of GDP in property taxes compared to 0.6% in emerging market economies, but Pakistan’s figure is only 0.1%. According to some estimates, 50% of Pakistan’s workforce is in the untaxed economy, which accounts for around 35% of GDP.

Money smugglers count Pakistani rupees and US dollars at an exchange in Islamabad. Photo: AFP/Aamir Qureshi

Good news here is that much of Pakistan’s mighty military business empire is no longer tax exempt. But the military continues to run some of the biggest companies in the country. .

As long as the unholy economic trinity of property development, retail and sugar cane barons remains outside the tax net, Pakistan will not be able to generate enough tax revenue to pay its bills, let alone to improve its indicators of socio-economic well-being.

Pakistan has serious long-term structural economic problems, and the costs of this year’s devastating floods will run into the tens of billions of dollars. Suffering from massive floods every 10 to 12 years, which are getting worse and more frequent due to climate change, Pakistan is one of the most water-stressed countries in the world.

Rebuilding the destroyed infrastructure will be impossible for a country that is already heavily indebted, desperate for an IMF bailout and asking for financial help from the global community. Inflation was high even before the floods hit and is now around 25% and rising.

Miftah Ismail, who brokered the $1.17 billion temporary IMF bailout, was Pakistan’s fourth finance minister in five years. Ismail resigned and was replaced by former finance minister Ishaq Dar.

Dar ruled out a default, although he requested $27 billion in bilateral debt rescheduling, presumably to ensure repayment of sukuk (Islamic bonds) due in December.

Dar is generally blamed for Pakistan’s economic woes during the last term in power of the Pakistan Muslim League (PML). He is considered a pal of the Sharif Nawaz brothers who served three times as Prime Minister and the current Prime Minister Shahbaz.

Dar fled the country rather than face corruption charges, but his arrest warrant was canceled to allow his return. There are also serious corruption charges against the two Sharif brothers.

The Pakistan People’s Party is the PML’s long-time adversary but is currently allied with it against ousted Prime Minister Imran Khans Pakistan Tehrik-e-Istiqlal. It also has a serious corruption problem. Former Pakistani President and current party leader Asif Ali Zardari was known as Mr. 10%.

Asif Ali Zadari is known to some as Mr. 10%. Image: Twitter

Pakistan is a corrupt rentier state. The elite depends on extracting rents, whether from its geostrategic position, massive foreign aid loans or other aid or remittances from Pakistani workers working in the Gulf.

Because it is a consumer-oriented elite that does not invest in the Pakistani economy, there is little valuable economic development to show for all this influx.

Its economy’s ability to manufacture and export high value-added items essential to support growth in workers’ real wages and living standards is lower than in comparable countries.

To further complicate the political situation, former Prime Minister Imran Khan was removed from office in a vote of no confidence in April 2022. Still, Khan seems to be gaining popularity by the day and is planning mass rallies to destabilize the government present and impose early elections.

General Bajwa, head of the Pakistani army and a particular target of the Khans of Imran, has retired, but his replacement, General Asim Munir, should also be in the crosshairs of the Khans. This will further exacerbate political tensions and increase the likelihood of domestic unrest.

Pakistan is an unstable country at the best of times. It is now facing a diabolical mix of natural disasters, economic crisis and political instability.

Feisal Khan is in the Department of Economics at Hobart and William Smith Colleges in New York.

This article, republished with permission, was first published by East Asia Forum, which is based at the Crawford School of Public Policy within the College of Asia and the Pacific at the Australian National University.

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